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PEER COMPANIES

ET Intelligence Group: Moderating volume growth of Royal Enfield, a key brand, is a major challenge for Eicher Motors.

Lower demand in Kerala and Maharashtra and rising competition amid the launch of Jawa bikes by M&M and future launches by Harley Davidson in 2020 and Bajaj Triumph in 2021 are likely to restrain Enfield’s volume growth to single digits in the coming quarters.

Enfield’s sales volume fell by 6 per cent to 194,473 units in the December 2018 quarter. It has been sliding since July with rising cost of ownership of premium bikes due to higher insurance cost.

The pressure on volume accentuated since November after the company started passing on the higher cost pertaining to anti-braking system (ABS). It has increased prices by 6 per cent in the past three months. Prices are expected to increase further by 6-7 per cent in the next few quarters.

The company has estimated production of 870,000-880,000 units of Enfield for FY19 implying volume growth of 6-7 per cent, which is the lowest since FY11.

Despite this, the street is not convinced about the company’s guidance. To meet the guidance, it needs to sell at least 84,000 units in each of the last two months of the current fiscal that ends in March. This looks difficult given that the company sold 72,000 units in January.

In addition, the company said in the latest earnings call that inquiries at the showroom in the mature markets is declining.

Enfield’s volume has a lagged that of the premium bike segment in the past six months. Its market share in more than 125 cc bike segment dropped to 25 per cent in FY19 so far from 27 per cent in the previous fiscal year.

The company has been maintaining operating profit margin of 30-32 per cent in the past ten quarters but it may be affected in the future given rising competitive intensity.

The recently launched Jawa motorcycle is BS-VI norms compliant.

Hence, it may not require any significant price increase to comply with new emission norms. Which means, it may be easier for Jawa to gain market share.

Given the slowing sales volume, the premium multiple of Eicher Motors over the average of the mass market two-wheeler Hero Moto-Corp and Bajaj Auto is likely to shrink further. At the closing price of ?21,032, Eicher’s stock was traded at 20 times of FY20 projected earnings compared with the five average of 30 times.